Business management - Making financial decisions - Payback method

Payback method

Definition: This method measures the length of time it takes for the subsequent net cash flows arising from an investment to repay the initial capital invested.

Method:

• Establish the payback point, which is the point when the revenues equal the initial investment.
• Add up all the revenue values until they reach a point either 'dead on' the payback point or 'between' the payback point
• If it is 'between' the payback point, find what is missing by taking the year before value minus the initial investment. Leaving with the difference.
• Divide…